We’re buying a house for cash. Will we owe capital gains tax?

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Q. We plan to buy a house for cash, around $400,000, and later prepare our current house for sale, hopefully in the same same year. Since we are paying cash for the one we are buying, will we have to pay any capital gains when we sell our current house — probably for around $250,000 — that we have lived in for 20 years? Everyone is saying we will have to sell our house first and then use that money to buy the second one.
— Seller

A. Congratulations on your plans for a new home.

The capital gain exclusion is one of the most valuable tax benefits available to homeowners.

For a qualifying sale, married taxpayers filing jointly can exclude — pay no federal income taxes — on up to $500,000 of home sale profits, said Jodi Cirignano, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

Taxpayers filing as single can exclude up to $250,000 of home sale profits, she said.

There is a two-part test to qualify for the exclusion.

“The first is the ownership test, meaning that the sellers must have owned the home for at least two years during the five-year period ending on the sale date,” she said. “The second is the use test, meaning that the sellers must have used the property as their principal residence for at least two years during the same five-year period.”

The home you are selling is your primary residence and you have lived in the residence for 20 years. You have met both the ownership and use test and are eligible to exclude up to $500,000 of your home-sale gains, Cirignano said.

As always, you should consult with a tax professional to discuss your particular situation.

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This story was originally published on April 21, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.